Market Update

Right now, any one who says they know what's going to happen in the market is simply guessing (I mean short term ), I can't even give you a decent probability YET, but I suspect something will develop.

I don't see this as an advantageous area to be trading so if anything I'd be doing some portfolio maintenance/Spring Cleaning and paying attention and looking for changes in character and subtle hints, they could be any where, in credit, Treasuries, VIX futures, the A/D line, market breadth, VWAP, currencies, etc. It's a lot of looking which I'm doing.

Here is what we have so far and why I say no one can tell you what will happen, especially as we have increased volatility, unpredictability, we have those trying to pin the market for options expiration of the weeklies and we have those who are just selling any strength, plus it's a Friday before a weekend when traders rather not hold risk and I believe we have the F_E_D's POMO schedule for June coming out after the close, not to mention currencies, emotions, etc-we have a thick stew of a lot of different dynamics.

This is all we know for certain right now, that will change-it always does.


IWM

 1 min had a positive divergence on the open, this is the NYSE Specialist effect, although I'm not saying they did this, this is the same concept, gap down to the lowest area of the bid/ask stack, buy there and run it up, that doesn't tell us much.

3C being almost perfectly in line since doesn't tell us a lot either except there isn't a really ugly negative in to the move.

 2 min chart was also positive at the open, then in line, now a slight relative negative.

The 15 min chart shows the massive distribution on the reversal, the "W" area (yellow) and the accumulation of that base, but it doesn't look so hot today.

This could lead to a number of scenarios with this volatility, a move down in to the close and then a resumption of the base's implications to the upside next week or a break down today, there are a dozen scenarios I could name. Until we have more information, it's impossible to say, especially with the 15 min looking this way right now.


QQQ

 1 min distribution yesterday thus the PUT that was closed this morning, you see that, how nimble you have to be even with a small trade like that? Imagine those who can't see what we see and are trying to buy the dip or swing trade, they're getting slaughtered in the volatility.

Again we have a positive on the open-the NYSE effect,  and in line now

3 min negative yesterday, in line now-at least as of the capture of this chart-actually I looked, still in line.

 QQQ 10 min not seeing any strength from this morning's move, so it's not that strong.


SPY

 1 min perfectly in line and still is.

the 5 min is in line intraday, but back out to the trend of 3C and give it some context beyond intraday...

The period we are looking at is the last leading negative divergence to the right.

The 15 min chart with the "W", this gives some impression of hope.

Looking at the chart above, it "seems" like the "W" base is still or can still be salvaged and/or in play. Today's Op-Ex pin makes price do funny things to make sure roughly 90% of all options (calls and puts) expire worthless because Wall St. writes the most options, retail (like us) by them, actually the juice is in writing them, the premium is in writing them and so are the probabilities as roughly 90% expire worthless and the writer keeps all the premium.

The point I'm trying to make is this, even if we take this 15 min chart and move forward as if the "W" base will still pop to the upside, there's still the story of the journey between here and there, just like there's the bigger story of the journey from here to...

HERE

I'll give you whatever I come up with as soon as I come up with it. 

Needless to say, with as many assets as I need to watch, my first priority is to all members which means I'll be slow like yesterday in answering individual emails. This is a perfect example of the problem I face in trading a model portfolio of my money, it sure is hard to put money in the market and not have it be your first or even second or third priority.

QQQ, XLF, DGLD P/L

Here's the P/L for a bunch of trades all taken on yesterday in the last hour of trade.

The fill for the QQQ Puts gave us a gain of +18.5%

The fill for the XLF Puts gives us a gain just shy of +15%

Not bad for an hour of market exposure.

DGLD actually didn't fill for me until this morning, I placed it late, it went in to the next day's que and I couldn't find a cancel so I left it and the 3X inverse ETF yielded a small gain of $1 a share, less than the 1.89%

I could have made a decent gain with MCP had I closed it on the open.

I still have this 15 min positive and range as does the market so there may still be hope.

I have been considering putting a real model portfolio on the new site which is coming along, this has been something I've wrestled with for a long time. It obviously would not track all positions, it would be a specific trading portfolio but my fears are that too many members may try to follow what I do exactly and that's not what I want to encourage, I want to encourage you to use the information and incorporate it in to your own style of trading. What works for me isn't going to work for all of you. For instance, I have an extremely high risk tolerance, it doesn't cause me to lose sleep, I don't get nervous or upset about deep drawdown so long as I still have an objective edge I believe in and if members tried to follow my trades, I don't think all members could stick with them and even a fantastic trade could end up being a horrendous loss for members. 

WOWS was NEVER meant to be a "Follow me", "guru" type of site, it has always been about helping you find what works for you and incorporating the information and concepts we have as well as tools to enhance your own trading. In essence, to teach a person to fish (and help them teach themselves how to fish) rather than create WOWS crack heads that just want to be lead by the nose. 

I'll admit, I'd have a much bigger site if I marketed myself as a guru and just gave away trade ideas and didn't waste anyone's time with the concepts, there are a lot of people that want nothing more than that, but to me, that's very dangerous.

The other problems have been, well the MCP problem. MEMBERS COME FIRST, which means my money would come second or third and rather than selling MCP at a profit, I'd be watching the open to make sure nothing horrendous is happening, looking out for my members.

Certainly not lastly as there are many issues, but one of them has been that I've had a lot of members over the years ask if I trade my own account and what my policies were if I did, what they were concerned about and rightfully so was whether or not I was entering trades and then posting them, effectively front running my members which wouldn't make much difference most of the time, but in an illiquid stock, it could make a big difference and I could stand to profit off my members. Those of you who know me know I'd never do anything like this, but its a valid concern. I suppose a timestamp of the execution of my position would clear that up.

So those are a few issues I'm wrestling with, otherwise I think a real model portfolio that goes in to more risk management on actual trades, would be beneficial.

We'll see.

Quick Market Update

The averages according to price and 3C charts in the early/fast timeframes where it matters this morning have a foothold, it's tenuous at best, but this entire "W" process has been as well so nothing new there.

As pointed out last night, although the AAPL-Effect or AAPL-lesson (It doesn't matter what the intraday divergences are when the herd starts to stampede which is what happened in AAPL just before it broke, but that was on a specific catalyst that Dan Loeb's top 5 holdings no longer included AAPL and the herd likes to follow Loeb as he's about the only Hedge Fund manager out there consistently beating the market-seriously, about 90% of them aren't even keeping pace with the SPY) can take hold at any time, we still have the 15 min positives in several of the averages for the "W" pattern so that's a bit of strength still in place.

Otherwise for the most part we are in line intraday in most averages and timeframes, some are a bit better, some are a tiny bit worse, but all in all, kind of dull looking at the moment.

Remember we do have an op-ex and that's a lot of premium so a pin is still probable, even if not as probable as the recent past. After 2 p.m. or so when most contracts are closed, the market starts to move out of the pin. We should have a good underlying read of conditions before then.

It does appear there's some effort being exerted to pull the levers-HYG, TLT and VXX.

As for Index Futures, most have actually headed higher and met up with the 3C leading divergences from pre-market.

The Yen intraday looks as if it wants to head higher, that's not good for the market, we'll see if that divergence fires or not.

More coming, but as we hit the leading positives, the market is now at a neutral point as far as short term divergences.

Selling DGLD (3x Short GLD opened near yesterday's close)

Closing XLF June $20 Put

Closing QQQ $74 Put

Note TF and NQObservations and the old NYSE Specialists' Trick

I was going to point out part of this before ES's 3C chart exploded higher and the open gave me more to work with.

 NQ (NASDAQ 100 Futures)  overnight, note there was a positive divergence before that comment out of Japan which is a VERY sensitive topic as USD/JPY is the last carry trade open and at 200:1 leverage, every pip (the smallest measurement of price-usually out to the 4th decimal) can mean millions of dollars. 

The pre-market positive is like ES's, except ES shows a very clear change right before the open with a leading positive spike.

  TF (Russell 2000 Futures)  overnight also were building a positive divergence, of course its impossible to say, but perhaps this was strengthening of the "W" base before carry traders hit the Panic (Super Fast Sell USD/JPY red button).

USD/JPY futures  overnight with a positive divergence, actually quite large which leads me to believe we are seeing an old NYSE opening tactic, I needed to see the open to try to confirm.

We knew yesterday that the charts in intraday and further out were negative so a drop this a.m. is no surprise, however on a short term intraday basis, the SPY just caught down to 3C, so far they are now in line which is an improvement over leading negative.

So far my theory is right, but it played out faster than I can type, we'll have to see where it goes from here.

Oh, the theory...

A lot of independent professional traders, especially day traders, will or would not trade any NYSE stocks at all. Why?

There's a difference between NYSE and NASDAQ stocks and the primary difference is the match-maker or middle man. On the NYSE they are called "Specialists", when you see the floor of the NYSE and traders holding up tickets and screaming, many of those traders are "Specialists".

Since the NASDAQ is not a specific place like the NYSE, but rather a series of networks that makes up the market, they have what is called a "Market Maker". Both middlemen have a function, they usually work for a big house like GS or MS and represent 1 or several stocks and make a market in those stocks, there job is to facilitate the smooth flow of transactions.

By law, even if a market is dumping and there are no bidders willing to buy shares you want to sell, "If" you sell them at market and are willing to accept the bid from the market maker, the MM has to, by law (in exchange for many perks like naked shorting, etc.) take the other side of your trade- same for Specialists.

The main difference is that the best bid/ask are the opening for NASDAQ stocks and they open at 9:30, by contrast on the NYSE, the specialist determines supply/demand and the opening price, they also determine what time the open is, I have had NYSE stocks open at 10:30.

One of the Specialists tricks use to be to see a negative/ugly pre-market and gap the stock they represent down to below the level of the sellers, then they'd buy that gap and since the entire ask stack was taken out (sellers), the stock would rise so buying the opening gap down would usually net you money, but traders don't like the arbitrary nature os Specialists powers.

It looks like that's what has happened at least on the open, it's clear in the all of the averages this morning.

From here we watch 3C, we still have an Op-Ex pin to contend with. We may see a small base here before we can head up which would be useful, IF we get a strong divergence with it.

Pre-Market

**Update, 3C Index futures are rocketing higher.

Overnight the main event was pretty silly, but a Tokyo professor by the name of Takatoshi Ito, who use to be a deputy at the Japanese finance ministry, said overvaluation of the yen versus the dollar has been corrected, that in turn sent the USD/Yen plunging overnight and right through the $101 support to a low just over $100, ironically there has been a small "W" that appears to have put in a temporary bottom for the time being, however this took all risk assets down with it, for instance, ES....

You can see the event quite clearly and normally I'd dismiss it if the timing of the comments and the move didn't line up perfectly.

In any case, since the USD/JPY, which as I said yesterday "is all that matters for risk markets now", has put in a small "W" bottom, ES has put in a positive divergence and is starting to reclaim some ground, this in itself could require a small base, not necessary, but could.

Europe didn't help matters, but this was more about sentiment already having gone south so it didn't matter what came out, but  the European April unemployment rate hit a new record high of 12.2%. Then some comments that the ECB is ready to intervene on rates and will consider all measures to maintain credit conditions sent the EUR lower, which is largely irrelevant to risk recently, whereas it use to be the main driver with nearly a 1.0 correlation. There were some good economic data too and more banks scheduled to pay back their LTRO loans, but as I said, sentiment already went south, this is why fundamentals don't matter, valuations don't matter, everything in the market is sentiment. You are better off majoring in psychology than economics if you want to be a trader.

Actually, I'm off, something just sent ES 3C rocketing higher....

"W"

Lots of things going on, I could write a huge post just on the macro-economics and certainly on the big picture, but right now everything in the immediate future can be summed up with a letter, "W".

Does this "W" base hold and make the move we expected and the move that would be a gift from the market spirits or does the increased volatility, unpredictability, fear and chance the herd stampedes starting with a big hedgie saying, "He who sells first, sells best" send this market DOWN?

 The SPY Trend Channel is very close to a change in character that changes trends.

 Like I said, "Changes in character lead to changes in trends".

This price pattern could be interpreted by technical traders as a bullish flag, a bullish pennant or something else, at this point the market will give you whatever you want to see, bullish or bearish, you can make your case. We try to do better than looking at the price pattern of 1 chart, but if this is anything, then it is...

 A "W" base that can support a emotional move to the upside, but it's very close to failing.

How can I say this is a "W" base, I can say that because I can prove the accumulation at the lows as a "W" base should do.

Lets look at the SPY 3C charts through a variety of timeframes, you can see two things, 1) there has been significant selling in to any bit of strength and the base has seen real damage the last couple of days, but there's also a bigger picture that can still pull this out of the jaws of the bear, if only for a week, the end of the story is already written, it's just how the final acts gets us there.

 SPY 1 min, a little price strength is sold hard. Will the sellers overwhelm those who put together the base? Remember, they didn't build a strong base which simply means they weren't willing to invest a lot here as things can easily go wrong.

2 min leading negative- same story

5 min chart shows the accumulation where it should be in the "W" base. Today saw a lot of damage as sellers took advantage of any price strength they could get to and these aren't retail traders.

 The SPY 30 min shows that even if the base holds and we get an emotional 5% 2-day gain which would scare even some of our traders who have a keen understanding of the market, this chart alone tells us that it really doesn't matter what happens on the upside as it is just emotional warfare, you put your money where your mouth is so to speak, and this clearly shows there's no faith left in this market.

Any bounce or rally is capped by this chart alone.

If we go to the 2 hour chart where huge flows of institutional money are tracked, we see a leading negative divergence that is exceptionally deep, this is like taking the importance of the 30 min chart above and multiplying it by 10, this is a really ugly chart, the bottom is going to fall out and soon, it's just how they write the last scenes leading to the climax.

 At 15 mins on the SPY, this "W" base and accumulation is still strong enough even with today's butt whipping to pull a rabbit out of the hat, this chart tells me that this is still the most likely ending for our story, it may or may not matter, but I understand the F_E_D releases the JUNE POMO schedule tomorrow after the close, that could tell us something before the June F_O_M_C meeting.

This is an old political trick, if you have ugly news you want to bury, you do it around 5 p.m. on Friday when no one is watching the news so this could be a real wild card.

 The 2 hour SPY chart, the trend and big picture doesn't get any clearer than this.

HYG intraday

High Yield Credit intraday. Both look like they were ready to participate in a short term move, the same as we are when we open call positions for short term trades.

FCT as a sentiment indicator.

FCT's bigger picture, this is one of dozens upon dozens of charts that all tell the same story at the same time. I said, "The back of the market is broken, but just like a snake with a broken back, this is when they are the most unpredictable and the most dangerous." 

As I always say, "Yields are a magnet for equity prices, the SHORT TERM has reverted to the mean.

A strange and uglier than usual day for another group of risk assets, commodities.

 Commods had no excuse today for such poor performance, but things in the market are often the opposite of what they appear.

 This is what I said about the set up in the VIX last night in the daily wrap, it looks like I was about as close as you can possibly get...

"And the VIX, this is really interesting because it just barely closed outside the Bollinger Bands today, a close inside the bands tomorrow sets up a VIX sell as we can see in the past, which would make sense with the pop higher in the market off the "W" base, but this is such an ambiguous signal in the VIX, I read it as being enough short term for the bounce, but not enough to halt the downside slide."

 The USD/JPY needs to move up to save this "W" base, the $USD looks ready too, not only the 3C chart's position, but look at that range, that smells of accumulation without even looking at 3C.

The Yen is the other half of that equation, the USD/JPY, for the base to be saved, the Yen needs to fall and while its longer term is setting up for a big move higher that takes the stock market lower, this chart suggests the $USD and JPY cooperate to save the "W".

I told you, "Wall St. isn't going to make this easy". Just imagine how difficult it is for those who are looking at price and MACE only, trying to buy dips and so forth.

We'll know more tomorrow- remember the market is free to start moving after about 2 p.m. as most options are closed by then.

As hard as this is to call at this point, it's really a pretty simple situation, it's "A" or "B". In my experience, once Wall St. sets up a plan, they rarely let it fail, the only thing that would do that at this point is a stampede.

Buying TLT

The last several weeks and especially days, we have seen an enormous leap in yield on US Treasuries (yields move opposite bond prices. TLT is a goof proxy for bond prices on the long end of the curve).

As you know, this violent drop in TLT has many thinking that Yields rise even further and TLT drops even further, but over the last several days I've had a much different opinion and expressed my confidence in it by opening an August TLT call today, one I will likely add to tomorrow. I believe this will be one of the neatest trades out there as the market reverses, but TLT in my view needs leverage, that's why I used August Calls today I also showed a way you can play this idea without options and still have some leverage by shorting an inverse or bear ETF.

I'd like to use even longer dated options for a longer lasting move, but I don't know how much I may trade around consolidations or take profits on big momentum moves, in other words, I really like this trade idea a lot and for a longer term trend.

At first I thought the drop was a head fake move and it still may very well be when the potential upside is considered, a head fake move of this magnitude would be in scale.

The last couple of days I've shown you the evidence that what I believe is actually manifesting, not in price where most traders are looking, but in 3C/ underlying trade.

Given the topic, I thought this article was very timely and it may help you understand why TLT and Treasuries will rise and Yields drop (thus taking the market fown with them.

This research note is from Kessler Investment Advisors, What has happened to long-term U.S. Treasury yields and why they won't stay up here for long